Krishak Bharati Cooperative Ltd. vs. ACIT (Delhi High Court)

Lease Premium is capital expenditure & not allowable as “advance rent”

The assessee entered into a lease agreement with NOIDA pursuant to which it acquired land on a 90 year lease. The assessee paid Rs. 2.53 crores as premium and agreed to pay annual lease rent of 2.5% of the premium. The assessee was not entitled to transfer the land before erection of the building without NOIDA’s permission NOIDA. There were other restrictions on the assessee’s right to transfer, assign or alienate the land. It was entitled to mortgage the land. Non-fulfillment or violation of terms and conditions of the lease agreement could result in cancellation of the lease. The assessee amortized the premium over the period of the lease and claimed the proportionate part as a revenue deduction. The AO accepted the assessee’s claim for 15 years. Thereafter, the AO, CIT(A) & Tribunal rejected the claim on the ground that the lease conferred an enduring advantage and the premium was capital expenditure as held in Mukund Limited 291 ITR (AT) 249 (SB). On appeal by the assessee, HELD dismissing the appeal:

(i) S. 105 of the Transfer of Property Act brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is capital in nature and the latter is revenue in nature. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps, having regard to the other circumstances, to ascertain the intention of the parties;

(ii) On facts, the premium paid is capital in nature and cannot be treated as “advance rent” because (a) it was a precondition for securing possession and was a one-time consideration; (b) annual lease rent was payable separately; (c) there is no material to support the contention that the annual rent was depressed and does not reflect the market rent; (d) there is no material to support the argument that the amount of Rs. 2.53 crore paid over 23 years ago did not constitute the true and real consideration for creating an interest in the property; (e) the registration and stamp duty and charges were borne by the lessee; (f) the restrictions imposed on the lessee regarding transfer and user of the land were consistent with the nature of interest created, i.e. lease hold rights; (g) the tenure of the lease was quite substantial and virtually created ownership rights in favour of the lessee & (h) exclusive possession was handed over to the assessee at the time of creation of the lease (Panbari Tea Co 57 ITR 422 (SC) & Durga Das Khanna 72 ITR 796 (SC) followed; Madras Industrial Investment Corp 225 ITR 802 (SC) distinguished);

(iii) The fact that the AO accepted the assessee’s claim for 15 years does not mean that he cannot change his stand because there is no “res judicata” in income-tax law and erroneous or mistaken views cannot fetter the authorities into repeating them, by application of a rule such as estoppel, for the reason that being an equitable principle, it has to yield to the mandate of law. A blind adherence to the rule of consistency would lead to anomalous results & engender the unequal application of laws and direct the tax authorities to adopt varied interpretations, to suit individual assesses, subjective to their convenience, – a result at once debilitating and destructive of the rule of law (Radhasaomi Satsang 193 ITR 321 (SC) distinguished/ explained).